Ireland, not the EU, regulates and ensures the solvency of Irish banks.
Dublin’s Treasury does not have the ready cash or borrowing capacity to adequately recapitalize troubled Irish banks, without pushing interest rates on its sovereign debt so high as to make its national budget woes wholly unmanageable.
Without an EU rescue, Ireland’s banks default, its government defaults, or its citizens face cuts in government services likely too draconian to be possible.
If Ireland still had its own currency, it could print money to recapitalize its banks—that is exactly what the Treasury and Fed can do for the FDIC, Citigroup, Bank of America, and other financial institutions.
Printing money would push down the Irish pound against the dollar and other European currencies, result in some inflation and lower Irish living standards, as bank losses were spread over the entire economy. Over several years, however, Ireland’s trade balance would improve, and absent other Celtic missteps, the Emerald Isle would work out of its mess.
Lacking the power to print money, Dublin must accept aid from the European Central Bank and stronger EU governments. This creates much political embarrassment for Irish politicians and leaders in donor capitals, resulting in theatrics and arduous negotiations.
Dublin makes the usual claims that it can handle its own problems, flight from Irish debt follows as well from the debt of other weak EU governments, and the euro weakens against the dollar.
Quick, decisive action becomes impractical when it is most needed, and nervousness abounds about contagion and the euro zone breaking apart.
Among the 50 states, the U.S. federal government significantly equalizes health care and social spending by transferring taxes revenues from rich states to poorer jurisdictions.
Germany, like New York, greatly prospers by participating in a huge single continental market, but Brussels cannot tax Germany to subsidize health or retirement benefits in Greece in the manner Washington taxes New York to subsidize Medicaid and social security payments in Mississippi.
Keeping its vast wealth to itself, Germany provides its citizens with gold plated employment security, health care and retirement benefits; portrays itself a model of Euro-efficiency; and lectures Greece and others on Teutonic frugality.
Greece, Portugal and others have borrowed recklessly to satisfy their citizens’ expectations for benefits on a par with Germany and now face severe austerity measures. If they still had their own currencies, devaluation would significantly help them manage their way out of debt as they trimmed their budgets less harshly.
With each crisis, the prospect of troubled nations dropping the euro and returning to national currencies emerges. Ultimately, this motivates Germany and others to come to their aid, but not without imposing more severe austerity than would be necessary if currency union were accompanied by EU taxation to fund social services and other functions of national government.
The Treaties of Rome and Maastricht provide Brussels with key powers for building a single market for private goods and services but on banking and social services, those deny Brussels the taxing, spending and regulatory powers to act as a sovereign government.
Unless this void is filled, the EU should not be printing money.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.
